Saturday, September 12, 2009

State Sponsored Monopolies

It's been a while since I wrote something. I'm still on the "kick California" mode.

In 1890, congress and the President passed the Sherman Antitrust Act. According to Wikipedia "The end sought was the prevention of restraints to free competition in business and commercial transactions which tended to restrict production, raise prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services, all of which had come to be regarded as a special form of public injury."

In California the entire alcohol industry is a complete monopoly sponsored by the state. In the end, the consumer and the small business are hurt while big business thrives by this state sponsored monopoly.

How is it a monopoly one may question? First let's start with the issuance of liquor licenses, particularly hard liquor. California legislation requires liquor licenses to be issues by county and issued each year. In most cases these licenses are not transferrable to other counties. There are a fixed number issued by county each year. The number issued is based upon population growth ratios for each county. One can obtain a variance to the law, but that's not often done. For example, Mono county has very few people living in it. But Mono county is where Mammoth Lake resorts are located. Every one knows the population can swell during the ski season. There are 12 hard liquor licenses in that county. The Alcohol authorities issued 3 more this year despite there was no growth in population. Those licenses sell for $300,000 or more. These high prices can also be found in Napa, El Dorado and Placer Counties.

The state sponsored monopoly occurs because the only businesses that can afford to purchase a liquor license for $200,000 or more are large corporations building huge restaurants. The small business man has no chance of getting a liquor license. Sure he/she may get lucky and win one during the state lottery. But not likely.

The result is that in those counties where the liquor licenses are expensive the chain restaurants dominate the food and beverage businesses in the area. And the mom and pop restaurants are disadvantaged by not being able to serve hard liquor.

So the state legislators are sponsoring legislation that prevents free trade when they limit the alcohol licenses. The state needs to review this law, as many state already have. There needs to be simple demand and supply analysis complete to determine where these licenses need to be.

For example, if the market is bidding up license prices in a county it is obvious the demand is high and the supply low. Answer: issue more licenses in that county. If the state see license prices are low in another county, then stop issuing licenses.

The market for liquor licenses in California is efficient enough to do these simple analyses. We as consumer need to call our legislators to change these ancient ways of conducting business.

On my next article I will describe the monopoly that exists with liquor brand distribution all across the nation. It is shocking and very few consumers know it is happening.

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